Pwc Karnataka Aerospace Hub of India Report 091211

7/24/2019 Pwc Karnataka Aerospace Hub of India Report 091211

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Karnataka - Aerospace Hub of India


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2 Karnataka - Aerospace Hub of India

Page 04 - Executive Summary

Page 6 - Indias Aerospace Industry

Page 11 - Karnatakas Aerospace Industry

Page 16 - Karnatakas Competitiveness as an InvestmentDestination for Aerospace

Page 18 - Karnataka State Government Policy

Page 24 - Vision for the Future

Page 26 - References


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Dhiraj MathurExecutive Director &Leader, Aerospace & Defence PracticePricewaterhouseCoopers India

Preface

I am pleased to present the PricewaterhouseCoopers-CII report onKarnataka- Aerospace hub of India.

The Aerospace industry is important to Indias strategic and economicinterests and is characterized by high growth potential. This report capturesthe perspectives, key developments and drivers in the Indian aerospace sectorand the challenges and the opportunities the sector offers. Karnataka in turn isbecoming a critical destination in the aerospace value chain.

Karnataka provides a balanced ecosystem for manufacturing and servicescompanies. While many large rms like operate from Bangalore, other newcompanies are establishing operations in the citys outskirts, in key industrialbelts surrounding Bangalore and in north Karnataka. The growth of otherallied industries has also helped the aviation manufacturing industry .The Stateis also unique as it has a large density of aerospace institutions and has thepotential of developing into an innovation and R&D hub .

We trust this report would provide an insight to existing and prospectiveinvestors with regard to opportunities in Karnataka with its potential to absorbinvestments in aerospace manufacturing, MRO and engineering design andR&D Sector.

We would also thank CII for giving us an opportunity to present theperspectives and opportunities for the sector in Karnataka and for their help inconducting the survey.


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Executive Summary

Indias Aerospace Industry Propelled by an increase in defence spending anda growing commercial aviation market the Indianaerospace industry has become one of the fastest-growing aerospace markets in the world. The rapidgrowth of this industry has attracted major globalaerospace companies to India and has incentiviseddomestic aerospace players to increase and deepen

operations. India as a Manufacturing Destination - The

PricewaterhouseCoopers study entitled ChangingDynamicsIndias Aerospace Industry indicates thatIndia is rapidly building capabilities to emerge as apreferred destination for manufacturing of aerospacecomponents. India has skills and competenciesin areas that include engineering, production,etc. These capabilities have been recognizedand harnessed by foreign companies outsourcingmanufacturing work to India. A potential opportunityexists in demonstrating Indias expertise in theprocess beginning right from initial design and ending

with the nal manufacture; this is where Indias realand sustainable advantage exists.

India as a Maintenance, Repair Overhaul (MRO)Destination - As a support service to the aviationindustry, the opportunity to provide MRO activitieswill grow with the industry. Indias MRO segmentis estimated to grow at 10 percent and reach USD1.17 billion by 2010 and USD 2.6 billion by 2020.Establishing MRO facilities in India will enableoperators to achieve faster turnaround times, savingsin operating costs and a decline of foreign exchangeout ows.

Karnatakas Aerospace Industry With the establishment of Hindustan AeronauticsLimited (HAL) in Bangalore in 1940, Karnataka has cometo be regarded as a pioneer in the aerospace industry.The State is positioned as an aerospace destination dueto the presence of numerous aerospace companies andPublic Sector Units (PSUs) engaged in manufacturing,design and development and MRO. In addition,several educational, scienti c and technical educationalinstitutions are fostering domain expertise in IT,engineering and design skills that can be leveraged byaerospace majors. Selected advantages that Karnatakaoffers as a hub for aerospace activities include -

Presence of large Defence PSUs

Presence of scienti c and technical institutes

Deep aerospace expertise - a network of 2000 SMEsthat do niche subcontracting work for the DPSUs

Information Technology (IT), design and engineeringexpertise

Manufacturing expertise Proximity to vendor base

Government support

Opportunity for related services like ground handling,and the manufacture of ground support equipment

Other advantages regarding location, excellenttelecommunications networks, etc.

Karnataka - An InvestmentDestination for Aerospace

ActivitiesThe existing supply chain developed by old-economyaerospace and engineering rms, an investor friendlygovernment with simpli ed procedures and fast-trackbusiness approvals through single window clearancemechanism combine to make Karnataka a veryattractive destination for the industry. The State is wellpositioned to become a hub for the complete aerospacevalue chain:

Karnataka as a manufacturing hub - With theheadquarters and laboratories of Hindustan

Aeronautics Limited in the capital city of Bangalore,Karnataka has always been a pioneer in developingnew aircrafts and helicopters for the Indian defenceand domestic civilian use. To augment this capabilityand to exploit its potential in the international market,the state government has planned an aerospacespecial economic zone (SEZ) at Devanahalli close tothe new Bangalore International Airport. In addition ,QuEST Global has established a manufacturing andprecision engineering SEZ in Belgaum.

Karnataka as a MRO hub - Currently, overhaulof some of the defence aircraft in India is almostwholly carried out by HAL. The Indian MRO industryfaces competition from Southeast Asian countries,

particularly Singapore. Despite this, the MROsegment has been growing with new investments


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PricewaterhouseCoopers 5

happening particularly at Bangalore. Large MROcompanies are enhancing their presence inKarnataka.

Karnataka as an aerospace hub for IT design andengineering services - As the Silicon Valley of India,Bangalore presents the highest concentration ofhighly mature IT and engineering services rms.Local software majors like HCL, Infosys and Wiprohave been serving clients in the global aviation andaerospace industry for many years. Global leadersin aerospace have also set up their technology andengineering services support centers in Bangalore.

Karnataka as an aerospace hub for R & D andsimulation - With top technological innovations at itsdisposal, Bangalore is rapidly becoming an aviationsimulation and R&D hub. Karnataka is an attractivedestination for simulation and R&D due to its inherentadvantages of a large number of highly quali edlow cost engineers and scientists. Simulation andhigh-end research has been the forte of government-owned organizations based in Bangalore. Someleading aerospace companies have engaged withtheir Indian counterparts to enhance their aerospacesimulation and R&D capabilities by establishingfacilities in Karnataka.Honeywel,l for example, hastwo R &D Centers in Bangalore.

Policy FrameworkThe Indian Government encourages private investmentin both the civil and defence aerospace sector withthe goal of encouraging technology transfers andachieving indigenization. 100 percent Foreign Direct

Investment (FDI) is permitted under the automatic routefor MRO, ying training institutes and technical traininginstitutions. The defence sector has more restrictions:while 100 percent domestic investment is allowed,subject to licensing, in the manufacture of defenceequipment, there is a cap of 26 percent on FDI (alsosubject to licensing l).India has a federal organization of tax administrationunder which the Central Government levies taxes onincome, custom duties, central excise and service tax.The State Government levies taxes, such as VAT, salestax, works contract tax, etc.The Central Government released the draft Direct TaxesCode which will replace the Income-tax Act, 1961, forpublic debate on August 12, 2009. The objective of the

code is to moderate tax rate and simplify tax laws. Alldirect taxes including wealth tax and income tax wouldbe brought under one code.The Central Government also proposes to simplify thevarious indirect tax levies through the introduction of theGoods and Services Tax (GST) with effect from April 1,2011(likely date). The proposed GST model will subsume

taxes like central excise, service tax, VAT, central salestax, entertainment tax, luxury tax, octroi, electricity dutyand purchase tax. The GST will give relief to the industrythrough a comprehensive and wider coverage of input taxset-off and service tax set-off.

The Government of Karnataka has decided to focusand promote the Aerospace sector, given the inherentadvantages enjoyed by the State. The Governmenthas a State Level Single Window Clearance Committeeand the State High Level Clearance Committee (forinvestments greater than INR 50 crore) with the objectof clearing proposals in a speedy manner. Further,the State has been making efforts to ensure that the

infrastructure requirements of the industry are metand has proposed to set up an aerospace SEZ, nearBangalore International Airport at Devanahalli, whereone thousand acres are to be devoted to expansionof aerospace activity, particularly MRO outsourcing.The Government is also promoting setting up of anaerospace university.

Vision of the Future India recognizes that it needs technological andmanagerial expertise from foreign Original EquipmentManufacturers (OEMs) that will be crucial to thesuccessful development of a commercial or defenceaircraft. Therefore, certain reforms will have to beinstituted to create a more favourable operatingenvironment and catalyze growth. Changes in theregulatory environment, market economics, andcompetitive landscape will create growth opportunitiesacross the value chain.

There is a buzz in the air not just from the engines ofglobal OEMs landing in Karnataka, but also from theactivity in the Government to promote the State as theaerospace hub of not just India but Asia.


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Indias Aerospace Industry

OverviewThe Indian aerospace industry is one of the fastest-growing aerospace markets in the world due to anincrease in defence spending, growing commercialaviation market, rising technological expertise andhigh levels of technical expertise and knowledge. ThePricewaterhouseCoopers report entitled ChangingDynamicsIndias Aerospace Industry indicates that the

rapid growth of this industry has attracted major globalaerospace companies to India and has incentiviseddomestic aerospace players to increase and deepenoperations. All segments in the aerospace industry,including civil and defence aviation and space, areshowing a signi cant level of growth, civil aviation,defence aviation and Space research -

Civil aviation -

The Indian aviation industry is one of the fastest-growing aviation industries in the world withprivate airlines accounting for over 75 percentof the domestic aviation market (as of 2006).Aspredicted in the PwC report, the sector has starteda rebound this year. The Indian aviation industryis generating a Compounded Annual Growth Rate(CAGR) of 18 percent. Passengers carried bydomestic airlines from January-February 2010were 8,056,000 as compared to 6,761,000 inthe corresponding period of 2009, representinga growth of 19.2 percent, according to a reportreleased by the Ministry of Civil Aviation.

The International Air Transport Association (IATA)in its Financial Forecast (March 2010) indicatesthat airline markets rose strongly at the end of2009 and early in 2010, with growth remaining to

be concentrated in the emerging markets of Asia,Latin America and the Middle East. Airlines inthe large developed markets of Europe and North

America face more sluggish growth. Given thesectors more favourable performance, the IATAreduced its estimate of 2009 net losses from USD11 billion to USD 9.4 billion. More signi cantly, theIATA now forecast smaller losses in 2010 of USD2.8 billion, compared to its earlier forecast of USD5.6 billion, with the largest improvements accruingto airlines in Asia and Latin America.

Defence aviation - India is expected to spend USD100 billion in the next decade towards purchaseof defence equipment. India is believed to be theworlds second largest buyer of weaponry. It is

expected that defence spending, which is currently2.1 percent of GDP, will substantially increase asthe nations robust economy continues to grow.That being said, Indias Defence Minister AK Antonybelieves that Indias ultimate goal is self-reliance. Mr.

A.K. Antony said, We want to produce equipmentfor the armed forces internally, domestically. We want

to strengthen our defence industries in India. Indianeeds a strong defence industrial base.

Space - The Indian Space Research Organisation(ISRO), was established in 1969, and has emergedinto one of the Big Three Asian space agencies,alongside Chinas CNSA and Japans JAXA. TheISRO is a signi cant partner in many internationalspace projects.

India as a Manufacturing andMRO DestinationIndia has a strong aerospace industry supportedby quali ed engineering, science and IT graduates,the availability of parts and components, robustmanufacturing expertise, production systems, leadingacademic institutions, a supportive R&D environment,etc. Many aerospace companies are looking to India asa manufacturing and MRO destination.

India as a Manufacturing Destination - ThePricewaterhouseCoopers study entitled ChangingDynamicsIndias Aerospace Industry indicates thatIndia is rapidly building capabilities to emerge as apreferred destination for manufacturing of aerospacecomponents. India has skills and competencies in

areas that include engineering, production, etc. Thesecapabilities have been recognized and harnessed byforeign companies outsourcing manufacturing work toIndia. A potential opportunity exists in demonstratingIndias expertise in the process beginning right frominitial design and ending with the nal manufacture;this is where Indias real and sustainable advantageexists. This is because systems and componentsrequire frequent design changes to suit the performancerequirements of different countries; India, with its hugepool of engineering resources, provides the convenienceof providing the required manufacturing services at onelocation. India already has Build to Speci cationscapabilities in space and missile systems,.


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There are several factors driving growth inmanufacturing in Indias aerospace industry -

Domestic Aircraft Demand - The demand for aircrafts,especially in Asia, is expected to grow as the worldeconomy recovers. According to estimates byleading aircraft manufacturers, India will continue tobe the fastest growing country in terms of air travelfor the next 20 years. Foreign aircraft manufacturersview Indias demand potential as an opportunity tooutsource manufacturing work, partly due to offsetrequirements, but mostly to derive cost bene ts.

Offset Requirements - The Government in its nationaldefence offset policy requires a minimum 30 percentplough back of foreign out ows from defenceprocurement into the Indian defence industry. Thispolicy enables foreign vendors to choose their Indianoffset partner and combined offsets could translateinto an opportunity of USD 2 billion per annum forIndia.

Cost Advantages - India offers cost advantagesthat vary in magnitude across the value chain.PricewaterhouseCoopers carried out a survey amongaerospace majors, in which respondents indicatedthat the savings are highest for IT and systemsimplementation activities in the value chain. Costsavings can range between 15 to 25 percent formanufacturing, depending on the type of component.These savings are expected in labour intensiveprocesses with import of raw materials. In fact, insome cases local sourcing of raw materials and partscan increase the cost savings by an additional 10 to20 percent.

Talent Pool - Global aerospace majors are facinga shortage of engineering talent. India has alarge talent pool of English-speaking engineeringgraduates; approximately 500,000 engineersgraduate each year.

Leveraging IT Competitiveness - Indian IT rmshave developed best practice processes for quality,project management, and organizational maturity.Many of these practices can be transferred to theaerospace industry which can, in turn, leveragethese mature processes to bring improvements intothe project lifecycle, covering core R&D services,design and development, veri cation and validation,

development of tools, reverse engineering andmaintenance services. IT companies will increasingly

bene t from the increase in engineering servicesoutsourcing programmes.

In order to become a major manufacturer in the globalaerospace supply chain, India needs to address thefollowing issues -

Access to Technology - Technology expertise is acritical challenge faced by the Indian companies.India needs to keep pace with the increasinglyhigh use of technology across the design lifecycle.Foreign companies are reluctant to transfer cuttingedge technologies with limited management controlin the Indian entity and in the past, have givenlicenses for older technologies.

Raw Material Development Capabilities - Therehas been a signi cant shift in the type of rawmaterials that are being used in airframe structures.The composition of materials used in aircraftmanufacturing is migrating towards new advancedmaterials. The use of composite materials is rapidly

becoming a mainstay since they result in lowermaintenance costs, make the aircraft lighter andmore fuel ef cient. The demand for composites inthe aerospace market is expected to grow in future.Currently, almost all raw materials are being importedby Indian suppliers.

Access to Funding - The aerospace business ishighly capital intensive. In the initial high growthphase, capital needs to be injected rapidly andcontinuously to maintain the planned growth rate.

Additionally, working capital requirements, marketdevelopment, brand building and awareness requiresigni cant on-going investment and expenditure.

Funding access can act as an entry barrier into thisspace.

Certi cation Process - Getting international airworthiness certi cations for processes and partshas been a challenge for India-based suppliers. Itis also a deterrent for OEMs to outsource some oftheir components to India since the approval forparts made in India can sometimes take too long andbecome cost inef cient (when their logistics costsare also considered). Countries like Mexico enteredinto a bilateral aviation safety agreement with theFAA allowing manufacturers to inspect and certifycomponents in Mexico, instead of shipping them to

the United States for safety checks.


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India as a MRO Destination - As a support service tothe aviation industry, the opportunity to provide MROactivities will grow with the industry. Indias MROsegment is estimated to grow at 10 percent and reachUSD 2.6 billion by 2020. Establishing MRO facilities inIndia will enable operators to achieve faster turnaroundtimes, savings in operating costs and a decline of

foreign exchange out ows. Robust MRO facilities willalso attract work from overseas, which will result in anoverall lift to the economy. India can become an MROhub to the world by leveraging -

Manpower cost arbitrage - MRO manpower costs inIndia are lower than the leading industrialized nations.Respondents to the PricewaterhouseCoopers surveyindicated that MRO manpower costs in India rangefrom USD 30 to USD 35 per hour. This is almost60 percent cheaper than in Western Europe or theUS but not signi cantly dissimilar to wage ratesin China or Indonesia. There is also a shortage oftalent in developed countries; these workforces are

ageing and the supply of high quality engineeringtalent is declining. India has a robust supply of talent,available at relatively cheaper rates.

Availability of talent - India has a large and ablepopulation of engineering graduates who are trainedand have suitable technical competence andexperience. MRO companies are also in the earlystages of working with educational institutions toguide graduates towards aerospace and also instituteafter-graduation employment programmes.

Locational advantages - Currently, there are no MROswithin a ve-hour y zone of India. Indian MROcompanies can leverage Indias inherent geographicadvantage of being between Europe and the AsiaPaci c region. Domestic carriers can bene t fromhaving MRO facilities within Indias borders since thisreduces costs associated with sending aircraft toDubai or Singapore. International carriers, who havebeen increasing their ight routes to India, can havetheir aircraft serviced in India, thereby leveraging costarbitrage opportunities.

Untapped opportunity - MRO companies believethat this segment offers signi cant opportunitysince demand for MRO activities/facilities is high.Given the growth of Indian aerospace, it is logical tobuild a MRO infrastructure to support current andfuture growth in the sector. In addition, the growthof several low cost carriers in India has increased

competitive pressure on the aircraft majors whowould prefer to have aircrafts serviced locally toreduce costs and on-ground time.

Graded Development - Each segment requiresspeci c skills, knowledge and regulatory approvals.While there is tremendous potential for India todevelop capabilities in all segments, currentlyairframe is the prime candidate for offshoring toIndia, especially for airlines with over 30 aircrafts,due to its labour intensive nature. As MROplayers competencies grow, line maintenance andcomponent repairs will be the next segments to beoffshored. Engine overhaul is likely to be the last

segment to be offshored to India after the IndianMRO market has matured.

In order to become a major player in the MRO segment,India needs to address the following issues -

Tax & Regulatory Environment - Participants in IndiasMRO industry believe that the tax regime needs tochange in order to enable India to positioning itself asan MRO hub to the world. This is further elaboratedupon in the chapter addressing Tax & Regulatoryissues.

Land Allotment Processes - A challenge for MROplayers is the absence or shortage of land at Indias

major airports. The lack of clarity behind landallotment and its unpredictability are issues thatdeter potential MRO players. However, with theGovernments decision to privatize the Mumbai andDelhi airports, MRO players are con dent that therewill be more transparency into the land allotmentprocess.


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Changes in the Indian AerospaceIndustry Enhanced Investment PlansThe government, on the advice of the Kelkar Committee,opened up the aerospace industry to the private sector.

A major trend being witnessed in the sector is the levelof investments being made by the State governmentand domestic and global aerospace majors in the sector.For example, State governments are helping boostdevelopment in the industry by establishing special

economic zones (SEZs) for the aerospace industry. These include:

The INR 3,000 crore Aerospace and PrecisionEngineering Special Economic Zone to be set up at

Adibatla, Ranga Reddy district in Andhra Pradesh;

The specialised aerospace park of 1,000 acresproposed near the Bangalore International Airport;and

The 2,500 acre SEZ for the aerospace and avionicsindustry, proposed to be established in south Gujarat,close to the Delhi-Mumbai industrial corridor. This islikely to have several of MRO facilities.

Aerospace companies are also investing heavily intothe industry by entering into joint venture agreements,establishing MRO facilities, etc. For example -

Aircraft manufacturing major, Boeing, is in theprocess of setting up a USD 100 million MRO facilityin Delhi. The MRO is primarily being set up to takecare of the maintenance needs of the 27 Boeing 787and 23 Boeing 777 aircrafts ordered by Air India.

GE Aviation and Air India will jointly invest USD 90million to set up a MRO facility in Mumbai.

Indocopters Private Ltd, distributor for Eurocopterhelicopters in India, is planning to set up a helicopterMRO facility in Bhubaneswar, the companys fourthservice centre in the country.

Bharat Electronics long-planned venture to makemissile seekers in India with an Israeli partner maybe signed this year. Ashwani Kumar Datt, Chairmanand Managing Director, BEL said We are trying tore-do the business plan and nalise (the details of theproposed joint venture), The venture, when nalised,may involve technology transfer, manufacturing atany of BELs nine facilities, as also co-developmentof seekers for other missiles. Apart from meetingthe needs of the two countries, the MoU of February

2008 also had a provision for exports.

New EntrantsRealizing an opportunity in this sector, several Indiancompanies, many of which operate in the automotive,heavy manufacturing and diversi ed industries, areplanning to provide production expertise towards thecreation of aerospace products.

Hero Motors plans to produce light aircrafts atits 300 acre aerospace park in Madhya Pradesh,in partnership with an unidenti ed Europeanmanufacturer.

The Tata group is keen to move into full-scaleaircraft assembly and production in both the civiland defence markets. The group sought approvalto set up an aerospace manufacturing facility on theoutskirts of Hyderabad. The company has alreadysigned deals with several International companies,including one to manufacture components forBoeing. It has assumed a one-third stake in ItalysPiaggio Aero, while Israel Aerospace Industriesand the Tata group signed a memorandum ofunderstanding to establish a new company todevelop, manufacture and support a wide range ofdefence and aerospace products, including missiles,Unmanned Aerial Vechiles(UAVs), radars, electronicwarfare systems and homeland security systems.

Mahindra & Mahindra has signed deals with BAESystems and is jointly developing a ve-seat lightaircraft with the National Aerospace Laboratories.

Larsen and Toubro is in the process of forming a joint venture with the European EADS to develophigh-tech defence electronics in Pune. This venturewill focus on developing electronic warfare, radar,defence avionics and mobile systems for defence

applications.By signing JV agreements rather than MOUs, bothlarge and small Indian industries are getting into thissector. The last 15 months has seen a number of JVsbeing nalised, signalling a transition from interest tointent and discussion to action. Prominent among theseare the alliances between .M&M BAE, Tata IMI, L&T EADS and DIEHL India Forge And Stampings Ltd


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Indias Role as an Engineering ServicesProviderGlobal spending on engineering services was USD750 billion in 2004, with aerospace accounting for 8percent; this could rise to USD 1.1 trillion by 2020,according to NASSCOM. The total offshore engineeringexpenditure is expected to grow to between USD 150to USD 225 billion by 2020 and India, with its talent pooland experience in engineering services, could assume

25 percent of this market. Activities in engineeringservices that could be outsourced range from conceptand detailed design stages to the testing, productionand support stages. Some of these activities includeindustrial / mechanical/electrical design and analysis,reverse engineering, system engineering, Computer

Aided Design (CAD) work, embedded software,derivative products, auxiliary functions (piping,cabling, controls), component testing, test equipmentdesign, prototyping, technical manuals, manufacturingengineering, tooling design and build and value/ costengineering.

Indian software companies are aggressively trying

to increase their share of the Engineering ServicesOutsourcing market. Changing DynamicsIndias Aerospace Industry suggests that Indian companies areincreasingly being viewed as long-term partners and notas mere suppliers/vendors. This enables Indian playersto participate across various phases of the productlifecycle. Software companies like Wipro, Infosys, HCLand Tata Consultancy Services have been active in theaerospace industry for several years. The softwareengineering services provided by most of these playersoffer complete solutions ranging from Product Designand Development, Embedded Systems and Avionics toProduct Lifecycle Management services.



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OverviewKarnataka is becoming one of Indias most dynamicstates! The State government is positioning Karnatakaas a major investment destination for a range ofindustries that include IT, auto, steel and aerospace.

While Karnatakas economy largely depends onagriculture with 71 percent of the population engagedin farming, the State has become a key contributorto industrial growth given the presence of severalindustries, such as aerospace, manufacturing,electronics, software, biotechnology, small and mediumscale industries, etc. To embark upon balancedregional development, the State government plans toutilize infrastructure initiatives to help further boostgrowth and employment.

Karnataka - Hubs of Expertise Aerospace zone - Belgaum Automobile zone - Ramanagara, ShimogaDharwad and KolarSteel zone - Bellary, Koppal, Bagalkot,Haveri, Gadag and Raichur

IT / BT zone - Mysore, Mangalore, Hubli-Dharwad, Belgaum, Shimoga, Gulbarga,Kolar and Mandya

Bangalore, referred to as Indias Silicon Valley, accountsfor approximately 38 percent of Indias software exports.The software industry is expected to generate USD 20

billion by 2010. Karnataka earned USD 17 billion (INR74,929 crore) from software exports last scal (2008-09) as against INR 60,800 crore the previous year,registering a 23 percent growth in rupee terms and 21.5percent in dollar terms.

Another industry that the State Government is focusingon is the aerospace sector. This industry continuesto draw large investments in the aerospace sector asit prepares to meet rising global demand. The sectorwill see robust growth due to a combination of positivemacroeconomic factors, the presence of aerospaceskill and expertise, favourable Government policies,

and domestic and global aerospace majors investmentand expansion plans in the State. Aerospace playersare looking to Karnataka to be an aerospace hub formanufacturing and for MRO activities and are -

Entering into joint ventures with overseas players

Establishing captive R&D and manufacturing centers

Providing components, landing gear, IT design andoutsourcing services, etc. to global aerospace majors

Establishing Special Economic Zones to harness theStates inherent advantages

Karnataka as an Aerospace Hub- AdvantagesWith the establishment of Hindustan AeronauticsLimited (HAL) in Bangalore in 1940, Karnataka has cometo be regarded as a pioneer in the aerospace industry.The State is positioned as an aerospace destinationdue to the activities of numerous aerospace companiesand PSUs engaged in manufacturing, design anddevelopment, and Maintenance, Repair and Overhaul(MRO). In addition, several educational, scienti c andtechnical educational institutions are fostering domainexpertise in IT, engineering and design skills that can beleveraged by aerospace majors.

Karnataka Aerospace Industry


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Presence of

scienti c andtechnical institutes

The presence of scienti c and academic institutions, such as the Indian Institute of Science and

Indian Institute of Management, enable the development of well quali ed technical experts whocan be absorbed into aerospace majors operations. (Almost 1,500 acres are being provided to theIndian Institute of Science to set up its second campus in the Chitradurga district.) The city alsoboasts of other prestigious colleges and research institutions.

Deep aerospaceexpertise

The Karnataka Udyog Mitras paper entitled Aerospace Industry in Karnataka (March 2010) putsforth that most of the development of Indias aerospace sector has been concentrated in Bangalore.The CII report entitled Vision 2015: KarnatakaA Global Aerospace Hub supports this by sayingthat the establishment of HAL in Bangalore in December 1940 by Walchand Hirachand and theMaharaja of Mysore heralded the beginning of Karnatakas aerospace industry. Other importantorganisations include -

Indian Institute of Science and Council for Scienti c Industrial Research that offers opportunitiesin research and training for aeronautical graduates.

The Government-funded Indian Space Research Organization is headquartered in Bangalore, andshares good synergies with other rms operating in aviation and aerospace sector.

The Aeronautical Society of India formed a platform where engineers, industrialists andprofessionals could work together for the industry.

Major aerospace organisations are located around Bangalore, including HAL, National AerospaceLaboratories (NAL), QuEST Global, Taneja Aerospace and Aviation Ltd, Dynamatic Aerospace, AirWorks India Engineering Pvt. Ltd., The Society of Indian Aerospace Industries and Technologies,etc. An existing supply chain ecosystem has been developed by these organizations.

Indias agship aircraft manufacturing and aviation research organizations are located in Karnataka,including:

Hindustan Aeronautics Limited (HAL)

National Aeronautical Laboratory (NAL)

Aeronautical Development Agency (ADA)

IT expertise andskill sets

Since independence in 1947, Bangalore has developed into one of Indias major economic hubsand is today known as the Silicon Valley of India. Karnataka boasts the presence of major ITcompanies such as HCL, Infosys, Tata Consultancy Services, Wipro, QuEST, etc. Karnataka-basedprofessionals have developed deep IT domain experience. Bangalore is the worlds fourth-largesttechnology cluster.

Manufacturingexpertise

Bangalore is a leader in heavy manufacturing due to the presence of PSUs, software companies,aerospace companies, telecommunications companies, machine tools manufacturers, heavyequipment manufacturers, defence establishments, etc. Bangalore serves as headquarters toseveral public manufacturing heavy industries such as HAL, NAL, Bharat Heavy Electricals Limited(BHEL), Bharat Electronics Limited, Bharat Earth Movers Limited (BEML) and Hindustan Machine

Proximity to vendorbase

There are approximately 2,000 small and medium enterprises focused on componentmanufacturing, tooling and testing equipment, and assembling. These companies meet thedemand of HAL, NAL and ISRO in addition to global aerospace rms.

Governmentsupport

The State Government is investor-friendly and has simpli ed procedures and fast trackedapprovals through Single Window Mechanism.

Companies can also receive assistance from Karnataka Udyog Mitra.

The Government is building airstrips and helipads in almost all districts.

Karnataka is one of the most progressive states in terms of the business environment forinternational investors.

Opportunity forrelated services

Bangalore operates one of Indias busiest airports as reported in the CII report entitled Vision2015Karnataka: A Global Aerospace Hub. As such, there is tremendous potential for activities inMRO and ground handling, and the manufacture of ground support equipment.

Other advantages Bangalore has a location advantage in terms of talent availability in IT, engineering and aerospace,proximity to industrial hubs like Pune, Hyderabad and Chennai, and connectivity to road, rail andair.

Fairly peaceful multi-cultural State that embraces different cultures. Favorable climate, congenial environment for private investors, cosmopolitan lifestyle, excellent

health care and education facilities.


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Issues to AddressTalent and manpower cost competitiveness, location-speci c advantages and the presence of specialistcapabilities make Karnataka a global/regional hub formanufacturing and for MRO activities. That being said,some challenges facing the State include -

Bangalore faces competition from other cities, suchas Hyderabad, Chennai and Nagpur, in the area of

aerospace manufacturing. These cities are activelypromoting aerospace SEZs and are trying to attractforeign investment. Karnataka can showcasemultiple destinations within the State as hubs foractivities in the aerospace value chain, therebyassuming a larger share of potential business.Karnataka has the advantage that it can projectmultiple cities (i.e., Bangalore, Mysore, Belgaum, etc.)as aerospace hubs.

As in the rest of the country, infrastructure is a keychallenge in Karnataka. While infrastructure facilitieshave improved there is a need to do more anddevelop more robust infrastructure - availability ofland, quality power and water.

An issue facing the industry (particularly the MROsector) is a shortage of land. MRO units should

be located close to airports. That said, the landacquisition process is time-consuming. TheGovernment has addressed this by proposing a MROnear the international airport in Bangalore.

The Land Acquisition Act makes it somewhattime-consuming for businesses to acquire land;streamlining land acquisition processes would beappreciated by industry.

InvestmentGlobal and domestic companies have been and continue to invest in Karnataka

Investing in Karnataka

In March 2009, Boeing launched the Boeing Research &Technology-India centre to carry out continued collaborationwith Indian R&D organizations, including government agenciesand private sector R&D providers, universities and othercompanies. The Boeing Research & Technology-India centrewill build upon an already solid foundation of collaborativeresearch projects in India. For example, since 2007, Boeing hasbeen working together with the Indian Institute of Science andWipro and HCL, as part of the Aerospace Network ResearchConsortium. This is Indias rst public-private aerospaceresearch consortium and it is devoted to emerging networktechnologies and concepts.

Boeing is partnering with the best researchers around theworld to nd the best technology solutions for our customers,

and we look forward to working with our partners here inIndia on some promising new technologies, said JohnTracy, Chief Technology Of cer and Senior Vice President

, Engineering, Operations & Technology, Boeing. DineshKeskar, President, Boeing India added, Boeing is de ned

by its technological edge. Working with Indias technology leaders helps Boeing assimilate new ideas and innovative processes into our products and programs. This also is goodfor India because it helps grow the capabilities of the IndianR&D community to meet the emerging needs in country.

European Aeronautic Defence and Space Co (EADS), whichowns aircraft manufacturer Airbus, commenced researchoperations in Bangalore in December 2009 with the opening ofan innovation centre. The innovation centre will work with theIndian Institutes of Technology in Mumbai, Kanpur and Delhi andthe IISc in Bangalore to design simulators and develop software.Located at the Airbus engineering centre, the India branch ofEADS Innovation Works is the third facility outside Europe andsecond in Asia after Singapore.

The opening of EADS Innovation Works in Bangalore is part of our global research and technology strategy. India is very strategic for us as a supplier and partner in high-end aerospace products and services. We will develop researchcapabilities to access new technologies and engineering

resources. India is an important part of our vision for research and technology growth owing to the bright engineering talent available here, said Jean Botti, Chief Technology Of cer,EADS.


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Rolls-Royce and Hindustan Aeronautics Limited signed anagreement in March 2010 to create a manufacturing jointventure company in Bangalore, India. The new company,a 50:50 joint venture between Rolls-Royce and HAL, willmanufacture compressor shroud rings. Construction of a newpurpose-built production facility, incorporating the latest inmodern manufacturing techniques, will commence in 2010 withcomponent production beginning in 2012.

India is extremely important to Rolls-Royce and we aredelighted to announce this new joint venture company withour partners HAL. This marks an exciting new phase of our

long-standing partnership with HAL and underscores ourcommitment to India and the aerospace industry here. India

is a country that is full of potential for Rolls-Royce and we look forward to continuing to develop our business here inthe future, said Sir John Rose, Chief Executive, Rolls-Royce.

Honeywell inaugurated a Rs.253.09 crore ($50 million) research,development & engineering facility at Orion, Outer Ring Road inBangalore in May 2009. The new R&D facility will accommodate3,000 people and have laboratory facilities, simulators, and atraining centre.

We are committed to India as a manufacturing location,export hub and most importantly as a centre of engineering

and R&D excellence. Our presence here has grown from1,000 employees in 2002 to more than 10,000 , said CEODave Cote.

Wanting to harness the potential of the State and goinga step further than investing in captive centers, QuESTestablished an SEZ in Belgaum. This SEZ will helpto develop an aerospace cluster in the state. Alreadyoperational, this SEZ will enable many companies tofurther leverage expertise in manufacturing, MRO andR&D.

Karnatakas Chief Minister B.S. Yeddyurappa, at theinauguration of the SEZ, said,

The QuEST Global SEZ in Belgaum has opened upnewer avenues to attract foreign investment in themanufacturing space. We are now poised to offer

expertise through competent local talent and corporatecommitment.


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Creating Aerospace Clusters in Karnataka

The QuEST Global Precision Engineering SEZ in Belgaum SEZ Particulars -

Formally inaugurated in November 2009 to focus on aerospace components and sub-systems by building aprecision engineering and manufacturing end-to-end eco-system (supply chain cluster).

QuESTs intention behind the establishment of the precision engineering SEZ in Belgaum is to enablethe development and establishment of an aerospace supply chain cluster, where all activities within theaerospace engineering and manufacturing spectrum occur. These activities include design and developmentengineering, aerospace grade special metals warehouses, aerospace castings and forgings, precisionmachining, sheet metal working, composites, special processing, fasteners, assemblies, testing, certi cation,

etc. for mechanical and electronics (Line-replaceableUnits( LRUs)) systems and sub-systems. The objectiveis to enable completely nished modules and sub-systems to be made within the SEZ to enable it to functionas an end-to-end eco-system for aerospace products. These investments are in addition to the engineeringservice centers and the manufacturing unit which has been operational in Bangalore since 1998 and 2006respectively. QuEST Global has an employee headcount of over 1200 personnel in its centers in Bangaloreand expects this number to double in the next few years

Spread over 300 acres and currently houses an engineering services facility, a precision machining facility anda sheet metal facility.

Infrastructure includes roads in and around the zone, a metal road for smooth movement of both car andcargo, a four-lane road to connect the zone with NH-4, a sewage system connected to a sewage treatmentplant, and a power plant.

Selected Units - Selected global corporations establishing units within the SEZ include SABCA,Magellan Aerospace and Farinia SA

SABCA will manufacture metallic parts for Airbus aircraft in its Belgaum unit. SABCAs Chief ExecutiveOf cer, Daniel Blondeel, said, The SEZ can take on start-to- nish projects and offers many advantages in themanufacturing space.

Magellan will set up a facility to manufacture components and sub assemblies for aero engines. Magellans Vice-President, Konrad Hahnelt, said, The location of the SEZ has increased our operations ef ciency.

Foundry and forging major Farinia will establish an aerospace forging facility

Bene ts to Local Economy - The initial investment for the SEZ project is INR 150 crore. We are looking at long-term gains. We are

looking forward to creating more than 7,000 jobs locally and infusing USD500 million into the economy in thenext 10 years, said Aravind Melligeri, Chairman and Co-Founder, QuEST Global.

The SEZ will generate INR 2500 crore of aerospace-related business in 10 years.

This is a special day for Karnataka. Bangalore is perceived to be the India hub for the aerospace sector, and

today the QuEST Global SEZ in Belgaum has opened up newer avenues to attract foreign investors in themanufacturing space as well. We are now poised to offer international level expertise with competent localtalent and corporate commitment, said Karnatakas Chief Minister, B.S. Yeddyurapa.

The State government plans to establish an aerospace industrial park near the international airport atDevanhalli. We have acquired about 1,000 acres of land adjacent to the new airport to build world classinfrastructure for the aerospace industry. About 250 acres of the land will be earmarked for a SEZ in theaerospace hub. The aerospace park is being located adjacent to a 1,000 acre electronic hardware park and a1,000 acre software park, which will enable the aerospace industry to leverage the strengths of the IT sector,said State Chief Secretary S.V. Ranganath.

Aero University The State Government plans to establish an Aerospace University with the aim of improving the the quality

of desired talent in the state. This will help boost employment besides providing an overall lift to the localeconomy.


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India received the largest number of R&D investmentsand the second-largest number of manufacturinginvestments between 2000 and 2008, of which a majorportion was awarded to Karnataka. Current estimatesof revenues from export of mechanical engineeringdesign, embedded systems/avionics and componentsmanufacturing in the aerospace sector stand at USD1.5 billion.

The existing supply chain developed by old-economyaerospace and engineering rms, the investor friendlygovernment with simpli ed procedures, and fast-trackbusiness approvals through single window clearancemechanism makes Karnataka a very attractivedestination for the industry. Despite some challengesrelating to infrastructure, Karnataka still provides thebest opportunity for the global investor.

Karnataka has a proven record given that over 500multinational corporations and 60 global Fortune 500companies maintain operations in the State.

Karnataka as an Aerospace Hubfor ManufacturingWith the headquarters and laboratories of Hindustan

Aeronautics Limited in Bangalore, Karnataka has beena pioneer in developing new aircrafts and helicoptersfor the Indian defence and domestic civilian use.HAL has always been at the center of Indias aircraftmanufacturing program. HALs joint venture withSnecma, a global manufacturer of jet engines forcommercial aircrafts, is based in Bangalore and aims toproduce components for aircraft jet engines.

To further enhance Karnatakas ability as amanufacturing base for aerospace companies and toleverage its potential in the international market, theState government has planned an aerospace SEZat Devanahalli. Located close to the new BangaloreInternational Airport, the SEZ has already receivedcommitments from major companies that include

Starragheckert Aerospace Components

Systems Controls

G.L. Polyurethane Company Private Ltd.

Micron Engineers

Priyaraj Electronics Limited Paci c Natura Biotech Private Limited

The establishment of this SEZ will also help complimentthe knowledge, skills and technology transfer thatwill occur in the existing QuEST Global PrecisionEngineering SEZ in Belgaum.

Karnataka provided a balanced ecosystem ofmanufacturing and services companies. While manylarge rms like Bharat Earth Movers Limited, Robert-Bosch International and Volvo India Limited operatefrom Bangalore, other new companies are establishingoperations in the citys outskirts, in key industrial belts

surrounding Bangalore and in north Karnataka.

Karnatakas Competitivenessas an Investment Destinationfor Aerospace

Country/Region R&D

India 7

US 6

Russia 5

UK 3

W.Europe 3

China 2

Mexico 2

CEE 2

S. Korea 2

Middle East 1

N. Africa 1

Other 1

35

Country/Region R&D

China 13

India 11

Mexico 8

US 8

Russia 6

UK 3

W. Europe 3

Middle East 3

N. Africa 3

CEE 2

S. Korea 2

Other 1

63

Number of Investments by Top 50 Global A&D companiesin international markets (2000-2008)


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The growth of other allied industries has helped theaviation manufacturing industry due to increasingmaturity of suppliers and economies of scale.

Karnataka as an Aerospace Hubfor MROReports estimate that India will need over 900commercial aircrafts over the next 20 years. MROoperations are required to maintain the growing eetof aircraft for Indian carriers. The opening up of Indianskies and increasing recognition of the talent poolin India has made the country into a very attractivedestination for MRO services. Indias MRO industryearns over USD 1 billion in revenues and has beengrowing at double-digit pace.

Currently, some defence aircraft in India are beingoverhauled by HAL. The Indian MRO industry facestough competition from countries, like Singaporeand Dubai. Despite this, the MRO segment hasbeen growing with new investments, many occurringin Bangalore. Selected initiatives by large MROcompanies to enhance their footprint in Karnatakainclude -

HAL proposed to set up an MRO unit with an initialinvestment of INR 120 crores at the old Bangaloreairport owned by the company.

National Aviation Company of India Limited (NACIL)signed an agreement with Airbus and Bangalore-based Jupiter Aerospace to form a MRO jointventure. The joint venture is for MRO and life cyclesupport of commercial aircraft.

Indian helicopter sales and support companyIndocopters will open its third MRO facility forEurocopter rotorcraft in Bangalore in the secondquarter of 2010.

Air Works India Engineering Private Ltd plans toinvest approximately USD 120 million over thenext three years to establish a MRO center nearBangalore.

Karnataka as an Aerospace Hubfor IT, Design and Engineeringservices

As the Silicon Valley of India, Bangalore maintainsthe highest concentration of highly mature IT andengineering services rms. Local software majors likeQuEST, HCL, Infosys, Tata Consultancy Services andWipro have been serving clients in the global aviationand aerospace industry for many years. Global leadersin aerospace have also established their technology andengineering services support centers in Bangalore. Forexample -

Honeywell Technology Solutions is a research labheadquartered in Bangalore and is working ondeveloping and testing ight management systems.The lab offers technical research and developmentservices to Honeywell business across the globe.

Infosys Technologies Ltd, another major software

rm, is a partner in forward integration andhelps build aircraft components and systems forcustomers, such as Boeing and Airbus, throughlocal vendors. In addition to delivering softwareand engineering services for aerospace clients, thecompany is now part of the product supply chain.

Wipro Ltd is another large software rm that helpsbuild electronic warfare systems, radars, aviationelectronics and ight simulators locally for USdefence contractors, such as Lockheed Martin andNorthrop Grumman. The company is setting updedicated units for these systems and anticipateslarger revenues from defence customers moving

forward. The company also maintains a tie-up withBritains largest defence manufacturer, BAE Systems,to build sub-systems for aircraft engines that powerbusiness jets.

HCL Technologies is also a leading software rmwith a good clientele in engineering services foraviation and aerospace sector. The company is astrategic partner for Boeings Dreamliner programand is a major player in the offshoring of aerospacetechnological development services. The companyhas also augmented its aviation and aerospacecapability by its joint venture with Smiths Aerospaceand by its acquisition of Axon Consulting which has

strengths in aviation MRO. (This acquisition enabled


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the company to acquire business from Jet airways inIndia to manage their MRO technologies.)

Airbus established an engineering centre inBangalore in October 2007. Almost 120 staffare employed and Airbus hopes to increase itsstaff strength to 400 by 2012. Airbus plans tooutsource 40 percent of aircraft design to local

companies. This engineering centre is the onlyone outside Europe for Airbus. Additionally, Airbusoutsources work to 20 Indian IT and engineeringservice providers that include Infosys, Quest, HCLTechnologies, etc . According to media reports,

Airbus plans to move 20 percent of its engineeringdesign activities to low cost countries, most of it toIndia.

QuEST Global, the Bangalore-based engineeringcompany, entered into a 10-year strategicrelationship with Magellan Aerospace. In 2007, the

rm set up the countrys rst special processingfacility for aerospace manufacturing, delivered

the rst set of A-380 components to SABCA andachieved Airbus AS 9100 certi cation. Quest is the

rst Indian private sector player quali ed to offerend-to-end solutions to EADS.

Karnataka as an Aerospace Hubfor R&D and SimulationIndia is an attractive destination for simulationand R&D due to its inherent advantages of a largenumber of highly quali ed low cost engineers andscientists. Earlier, simulation and high-end researchwas the forte of Government-owned organizations likeDRDO,GTRE, ISRO and CSIR; all these organizationsare based in Bangalore. In the last decade the country

has welcomed private foreign investment in R&Dwith government support and tax incentives. Someleading aerospace companies have engaged withtheir counterparts in India to enhance their aerospacesimulation and R&D capabilities:

Airbus Engineering Centre in Bangalore isthe companys high-tech aircraft componentmanufacturing facility that works on the developmentof tools to aircraft design and structural analysisusing software based simulation, among other things.

CAE, a global leader in aviation simulation productsand training services, made Karnataka its base inIndia, and is operating from an owned facility nearthe new Bangalore international airport. The Airbus

A320 and Boeing 737 Level D full- ight simulatorsin the CAE facility are certi ed by Indias DirectorateGeneral of Civil Aviation.

Boeing entered into agreements with Indian Instituteof Science, WIPRO and HCL to develop wireless andother network technologies for aerospace relatedapplications.

Mahindra and Mahindra signed an agreement for thedesign and development of a new general aviationaircraft with NAL, CSIR and the Government of India.

The wind-tunnel testing center at NAL is the primarysimulation testing facility for aircraft engines in India.


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Karnataka Udyog Mitra (KUM) Set up more than a decade ago, KUM works as a

single point contact for all investors - from receivinga proposal to ensuring its implementation, KUM isactively working with the investors at all stages.

The State Level Single Window Clearance Committeeand the State High Level Clearance Committee (forinvestments greater than INR 50 crore) have been

working to clear proposals in a speedy manner.

Land One main policy measure intended to smoothen the

path for investors is an exclusive land acquisitionpolicy and development of a Land Bank eachdistrict to have 1000-2000 acres acquired bythe Karnataka Industries Development Board forindustrial development. This eases the dif cultiesfaced by investors in creating the basic infrastructurebefore operationalizing the production facilities.

An aerospace park will be developed near

Bangalore by the State Government in associationwith the Society of Indian Aerospace Technologiesand Industries.

In developing industrial areas, the state governmentwould take measures to ensure that at least 20percent of the land is earmarked for the Micro,Small and Medium Enterprises sector, for necessaryvendor development support to the large projects.Further, while developing large industrial areas

/ estates 20-25 percent of the land would beearmarked for townships, facilitating walk to workconcept in such areas.

Power There is a concerted effort by the state to raise

the capacity of power generation to cater to thegrowing demand of industry. In the last 4 years,16 power projects have been approved in the Stateand this would add 10,760 MW to the State grid inthe near future.

Solar power projects have also been planned inBelgaum and Raichur districts.

Air Connectivity At present, the State has two international airports at

Bangalore and Mangalore. Bangalore International Airport Limited was the rst private airport in thecountry and has the capacity to handle 3000passengers per hour.

There are also two domestic airports catering to thenorthern part of the state at Hubli and Belgaum. Thepresent airport at Mysore is under upgradation andwill be soon open for commercial traf c.

The government has -

Started developing airports at Hassan, Shimoga,Bellary, Bijapur and Gulbarga

Started upgrading existing airports at Hubli,Belgaum and Mangalore

Started adding 12 airstrips in the state

Opened Karwar and Bidar Defence Airports forcivil traf c

20 Helipads are proposed in the State to provideeasy access to all districts and give the necessaryinfrastructure boost for heli-tourism.

Skilled Manpower With experience for more than six decades, the

State has built considerable human capital resourcesthat are available to companies engaged in theaerospace sector. Research, development andengineering design capabilities are well-developedin the State through the presence of internationally-renowned institutions, such as the Bangalore-basedorganizations, HAL, DRDO, ISRO, NAL, IISC.

Global manufacturers are comfortable outsourcingto India, particularly Karnataka, because of thepresence of electronic and technical skills and

uency in the English language.

The State Government proposes to invite offersfor establishing an Aerospace University to ensureadequate supply of skilled manpower for this sector.

Under the Government of Indias Skill DevelopmentInitiative, the Modular Employable Skills Schemehas been initiated in Karnataka. In 2009-2010,340 modules were developed in 32 professions fortraining of unorganized labourers, with priority givento automobile, construction of building, hospitalityand electronic elds.

Karnataka StateGovernment Policy


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Under this scheme, the government plans to train 10million people, by providing training in the IndustrialTraining Institutes or Industrial Training Centers (ITIs/ ITCs) and at any other location having facilities.More than 400 centers in the State have registered as

Vocational Training Providers under this programmeto impart training through courses in fabrication, auto

repair, electronics, process instrumentation, plastics,information and communication technology, materialmanagement, soft skills etc.

Tax FrameworkIndia has federal organization of tax administrationunder which the Central Government levies taxes onincome, custom duties, central excise and service tax.The State Government levies taxes, such as VAT, salestax, works contract tax, etc.

Corporate Income Tax Foreign companies can have business presence in

India either through Project/Branch Of ce (foreigncompany) or by forming a subsidiary/joint venturecompany (domestic company).

The effective tax rate is 42.23 percent (includingsurcharge & education cess (S&C)) for foreigncompanies and 33.22 percent (including S&C) fordomestic companies.

Companies are liable to Minimum Alternate Tax(MAT) at 18 percent (plus S&C) on book pro ts, whentax liability under normal Income tax provisionsis lower. MAT credit is allowed against tax liabilityin subsequent 10 years under normal income tax

provisions. Domestic company is liable to pay Dividend

Distribution Tax (DDT) at 16.61 percent (includingS&C) on dividend. However, dividend income isexempt in the hands of shareholders.

Accelerated depreciation of 40 percent is availablefor Aeroplanes-Aero engines.

Tax Holiday 100 percent tax holiday is available for 10 years

for Special Economic Zone (SEZ) Developers, Co-developers.

100 percent tax holiday from pro ts on exports forve years and a 50 percent tax holiday for next 10

years for units set up in a SEZ (during last ve yearssubject to additional conditions).

Export Oriented Units (EOU) or Electronic HardwareTechnology Parks (EHTP) or Software TechnologyParks (STP) is eligible for deduction of 100 percent ofexport pro ts for 10 years up to 31 March 2011.

100 percent tax holiday is available for the pro tsderived by a new undertaking which develops,maintains and operates any new infrastructure facilitysuch as roads, highway, bridges, airports, ports, etc.The tax holiday is available for 10 consecutive yearsout of 15 years beginning from the year in which theundertaking or enterprise develops and begins tooperate any infrastructure facility.

Scienti c Research & Development (R&D)Ifcertain conditions are met, deduction is available oftwice the scienti c research expenditure incurredby a company on in-house R&D facility where itis engaged in business of bio-technology or inmanufacture/production of electronic equipments,computers, telecom equipments, chemicals or otherspeci ed articles, like aircraft, helicopters, computersoftware, etc.

Royalty/fee for technical services received bya foreign company under an agreement withGovernment for providing services in or outsideIndia in projects connected with the security of India,is exempt, if such foreign company is noti ed byCentral Government in the Of cial Gazette. In othercases, in absence of permanent establishment of theforeign company in India, royalty/fees for technicalservices would be taxable at 10 percent (plus S&C)for agreements entered into after 1 June 2005,subject to ful lment of certain other conditions.


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General International transactions with associated companies

need to be at arms length price and subject totransfer pricing regulations.

Tax payer can approach high-powered Authority for Advance ruling to determine income tax aspects ofany proposed or current transactions.

India has entered into comprehensive treaties foravoidance of double taxation with more than 75countries and limited agreements with over 15countries. Tax implications under the domestic lawscould be mitigated by resorting to tax treaty.

Direct Tax Code The Central Government has released the draft

Direct Taxes Code which will replace the Income-tax Act, 1961. The Code aiming to simplify the existingincome tax law, is designed to provide stability inthe tax regime based on well-accepted principles oftaxation and best international practices.

Some of the key changes proposals of the Code are:

1. Reduction of the corporate tax rate to 25 percent.

2. Transition of Minimum Alternate Tax from bookpro ts to value of gross assets

3. Removing the distinction between long-termcapital gains and short-term capital gains.

4. Introduction of branch pro ts tax for foreigncompanies.

5. Introduction of general anti-avoidance measures.

6. Advance pricing arrangement for Transfer Pricing

7. Introduction of thin capitalization rules.The target date for introduction of the Code is witheffect from the nancial year beginning April 1, 2011.

Indirect Tax Implications forDefence Sector Customs Duties - Effective customs duty rate on

import of goods is 26.85 percent based on peakrate of customs duty. Exemption from customsduty is available for majority of goods imported inrelation to defence subject to ful llment of prescribedconditions.

Excise Duty - Effective excise duty rate is10.3 percent (inclusive of education cess) onmanufacturing activity. Exemption from excise dutyis available for goods manufactured for supply tospeci ed defence projects. Further, goods suppliedagainst international competitive bidding (ICB) arealso exempt from excise duty subject to ful llment of

prescribed conditions. Value Added Tax (VAT) / Central Sales Tax (CST) -

While inter-State sale of goods is subject to levy ofCST, intra-State sale of goods are subject to levyof VAT. The CST rate is 2 percent if the prescribedstatutory form is issued by the purchaser, whereas ifno forms are provided, the VAT rate applicable in theoriginating State of the Seller will be applicable. Formost goods, VAT rate in Karnataka is either 5 percentor 13.5 percent, depending on the nature of goods.

Service Tax - Speci ed services are subject toservice tax and the liability to pay service tax is onthe service provider. However, for few speci edservices including imported services, liability to payservice tax shifts on service recipient. Service tax rateis 10.3 percent (inclusive of education cess).

Research & Development Cess is applicable onimport of technology into India by an industrialconcern under a foreign collaboration. Presently,Cess is applicable at the rate of 5 percent. However,the Cess paid can be adjusted against service taxliability accruing under certain service categories

Indirect tax incentives available to SEZ units for itsauthorised operations.

Rates of TaxA ComparisonState VAT (Percent) Entry Tax rate

Karnataka 5 / 13.5 Product speci c rate -ranging from 1-5%

Tamil Nadu 4 / 12.5 NA*

Andhra Pradesh 4 / 14.5 NA*

Uttar Pradesh 5 / 13.5 Product speci c rate -ranging from 1-5%

Maharashtra 5 / 12.5 Product speci c rate -ranging from 4-30%

*Held unconstitutional


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Goods and Services Tax (GST) The Central Government proposes to simplify the

various indirect tax levies through the introductionof the Goods and Services Tax (GST) with effectfrom April 1, 2011. Some of the key features of theproposed GST are:

1. In the discussion papers released, theGovernment has indicated that GST shall have two

components, one levied by Centre and the otherlevied by States.

2. The input tax credit for the central GST and thestate GST would operate in parallel and wouldbe available for utilization only against theoutput payment of Central GST and State GSTrespectively.

3. Both Central and State GST would be levied onimport of goods and services into the country.

4. The incidence of tax will follow the destinationprinciple.

5. Full and complete set-off will be available on theGST paid on import of goods and services.

Foreign Direct Investment PolicyCivil Aviation and Airports FDI up to 49 percent is permitted for scheduled air

transport services/ domestic scheduled passengerairlines under the automatic route. NRI investmentis permitted up to 100 percent under the automaticroute. However, no direct or indirect equityparticipation by foreign airlines is allowed.

For non-scheduled air transport services/non-

scheduled airlines, chartered airlines and cargoairlines, FDI up to 74 percent (with FIPB approvalif FDI exceeds 49 percent). NRI investment ispermitted up to 100 percent under the automaticroute.

100 percent FDI permitted under the automaticroute for Maintenance and Repair Organisations(MRO), ying training institutes and technical traininginstitutions.

FDI up to 74 percent (with FIPB approval if FDIexceeds 49 percent) and NRI investment up to 100percent under the automatic route is permittedfor ground handling services subject to sectoralregulations and security clearances.

FDI up to 100 percent is permitted under theautomatic route for helicopter services / sea planeservices requiring DGCA approval.

100 percent FDI under the automatic route ispermitted in setting up of Green eld airport projects(existing projects would require FIPB approval for FDIbeyond 74 percent).

Defence 100 percent domestic investment is permitted

in manufacturing defence equipment, subject toindustrial licensing by the Department of IndustrialPolicy and Promotion (DIPP)

FDI, including NRI investment, in this sector ispermitted up to 26 percent subject to prior approvalof the Government and compliance with the securityand licensing requirements and guidelines issued bythe DIPP.

The guidelines for production of arms and

ammunitions include stipulations that themanagement of the Applicant Company/ partnershipshould be in Indian hands i.e. two-thirds of the Boardas well as the Chief Executive must be residentIndians. Further, there is a three year lock- in periodfor transfer of equity from one foreign investor toanother foreign investor.


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Special Economic Zone as apolicy framework for Aerospacemanufacturing in Karnataka Indias SEZ Act provides excellent tax incentives to

both developers and units that are located in theSpecial Economic Zones. The SEZ Act provides

scal bene ts to both promoters and investors,enabling India to become a preferred destination foroutsourcing manufacturing. The most signi cantaspect of the policy is that there is no exportobligation rather, units need to be foreign exchangepositive over a ve year period. Moreover, there isno such requirement for the developer. OEMs candevelop a defence SEZ and invite its suppliers to setup units in it.

The Government of Karnataka has formulated a StatePolicy for Special Economic Zones as per CentralSEZ Act 2005 & Rules 2006, with a view to provide

a hassle free environment for export production andto attract FDI. The objectives of this policy are to setup a single point clearance to SEZ developers andunits, to facilitate and expedite establishing of SEZs,to delegate the powers of the Labour Commissionerto the Development Commissioner of SEZs and toextend incentives as below:

Tax Incentives Indirect Tax Incentives

Income tax 100 percentexemption for 10 out of 15years for developers and100 percent 5 yrs, 50 per-cent next 10 yrs for units

DDT exemption (not forunits)

MAT exemption (also forunits)

No Customs Duty

No Excise Duty

No Service Tax No CST

Exemption from LocalTaxes and Stamp duty

Exemption from State Taxes for all purchases fromDomestic Tariff Area

Exemption from Stamp Duty

Exemption from Electricity Duty.

Capital subsidy for Common Ef uent Treatment Plant( Max INR 1 crore per SEZ)

In accordance with the above policy, the Karnatakagovernment has proposed to set up an aerospaceSEZ, near Bangalore International Airport atDevanahalli with one thousand acres to be devotedto expansion of aerospace activity, particularly MROoutsourcing. QuEST Global has already oriented itsSEZ for Precision Engineering to become Indias rstaerospace SEZ in Belgaum in November 2009.


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Global Trends Global aerospace sales are expected to reach USD 2

trillion over the next 20 years. The Asia Paci c regionis deemed to be the fastest-growing Aerospaceregion in the next 20 years with the eet sizeexpected to triple by 2025.

OEMs are striving to reduce design-developmentcycle times in order to bring new products to market

more quickly and cheaply as they refocus on theircore competencies in design, integration andassembly. Instead of producing major subsystemsthemselves or dealing with numerous subsystemscomponent suppliers, they have shifted responsibilityfor these activities down the supply chain.

The PricewaterhouseCoopers report entitled FlightGlobal brings out that the aerospace industryanticipates dif cult business conditions for thenear and medium term, but long-term projectionsare positive, with airlines expected to need 29,000new planes valued at USD 3.2 trillion between 2009and 2028. For now, the defense segment of theaerospace sector has offset the downward trendbecause it still bene ts from continuing governmentexpenditures for defence aircraft.

The demand for Unmanned Aerial Vehicles andRemotely operated aircraft is bound to increase.

Re-Evaluation of Supply ChainDynamicsThe global recession and signi cant marginpressures will continue to force global OEM and Tier-1 suppliers to undertake major restructuring and

cost cutting exercises. Emerging economies whichprovide signi cant cost bene ts are increasinglybeing considered as an outsourcing destination formanufacturing-related work. Karnataka could bene tfrom this trend with offset obligations acting as acatalyst. Efforts by domestic suppliers to move upthe value chain will also encourage foreign companiesto outsource more manufacturing related work, ratherthan only systems and low value IT assignments. Inaddition, the globalization of MRO services, manpowercost competitiveness, the availability of talent, locationaladvantages combine to make Karnataka a potentialregional MRO hub.

The large and rapidly-growing Indian economy, coupledwith impressive domestic demand for air travel andlarge defence requirements, has led the major aircraftproducers to conclude that India is an important futuremarket. The same is also true for all related maintenanceand repair services. Karnataka should in turn leverageits competitive advantage by way of availability of a

large low cost engineering and skilled talent pool andlocation advantage of having Defence Public SectorUnits (DPSU) units like HAL and BEL.

Technological IssuesKarnataka needs to keep pace with the increasingly highuse of technology across the design lifecycle. Foreigncompanies may be reluctant to transfer cutting-edgetechnologies with limited management control to Indianentities. These will have to be leveraged through offsetsand by increasing the FDI cap on defence manufacture.

In addition, the composition of materials used in aircraftmanufacturing is migrating towards new advancedmaterials. Currently, almost all raw materials arebeing imported by Indian suppliers. In the eld ofadvanced materials, novel processing and materialcharacterization methodologies are still emerging andwill take time before the State becomes self reliant.

Future ProspectsOEMs and Tier 1 suppliers will be looking ahead toestablish customer support centers for stocking spareparts, avionics repair workshops, logistic centers tooptimize supply chain management, training centersfor training of technicians, engineers, managers and

innovation centers besides alliances for manufacturingof sub assemblies. Karnataka, due to the severaladvantages it boasts of, can be a hub for suchaerospace activities. The offset policy, defence or civil,should also allow these to qualify as offset obligations.

Indias Offset policy, which prescribes 30% of all dealsabove 300 Crores to be reinvested into the country, areobliging aerospace partners to set up subsidiaries, enterinto joint ventures or outsource design, components,sub-systems, accessories to the Indian aviationindustry. Offsets can thus play the role of a catalyst indevelopment of aerospace MRO and manufacturingactivity by providing an added incentive to globalaerospace majors and their suppliers who are already

Vision for the Future


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seeing sense in putting up a strong presence in India.The effective implementation of such an offset policycoupled with an attractive FDI policy can hasten thepace of indigenization.

The future will also see SMEs in US and Europe buildinga presence in the Indian aerospace market by workingwith DPSUs such as HAL and other companies in its

supply chain. Similarly, there will be a growing numberof aerospace suppliers in the private sector who will alsooffer the opportunity to partner with lower tier suppliersof aerospace OEMs.

Leveraged by the buoyant Indian economy at a timewhen the Western markets are strapped of funds, Indiancompanies will be encouraged to expand into overseasmarkets by way of acquisition of foreign SMEs orentering into joint ventures with foreign vendors.

As a State, Karnataka has the resources to be a centreof aerospace excellence /cluster of creativity, whereit can endeavour to gain global notice for programmanagement, engineering, maintenance, material andinformation systems support and offer overhaul servicesto rotary and all xed-wing aircraft. Rationalization ofsome features of the existing policy regime will go a longway in assisting indegenisation and absorption of newtechnologies.


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References

www.dnaindia.com

www.economictimes.com

www.projectsmonitor.com

www.quest-sez.com

www.businesstandard.com

www.ibef.orghttp://karnatakaonline.in

www.boeing.co.in

PricewaterhouseCoopers, Changing DynamicsIndias Aerospace Industry

Karnataka Udyog Mitra, Aerospace Industry in Karnataka, March 2010

CII, Vision 2015: KarnatakaA Global Aerospace Hub

Hampson Precision Automotive (Ind ) Pvt. Ltd, A Concept Paper on Aerospace Sector, 2010

http://karnatakaonline.in

www.boeing.co.in

PricewaterhouseCoopers, Changing DynamicsIndias Aerospace Industry

Karnataka Udyog Mitra, Aerospace Industry in Karnataka, March 2010CII, Vision 2015: KarnatakaA Global Aerospace Hub

Hampson Precision Automotive (Ind ) Pvt. Ltd, A Concept Paper on Aerospace Sector, 2010


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Contact Us

PricewaterhouseCoopers (PwC) has a strong global Aerospace and Defence (A&D) practice that servesmost of the leading global companies. To assist our domestic and international client participate in theexciting growth of the Industry in India, we set up the A&D practice in India in 2007. With deep understand-ing of Government regulations and industry issues, PwC is a one-stop shop for clients and is competent toassist in various aspects of their businesses. Our team consists of professionals with diverse backgroundand experience and is integrated across all lines of service that include regulatory advice and assistance inobtaining approvals, tax and regulatory structuring, advisory services.To provide the highest possible level of service, we invest the time of our consultants in developing industryexpertise. The team maintains strong yet independent relationships with the Government and constantlyshares knowledge with players in the industry and Government.

Our Aerospace andDefence Team

Dhiraj Mathur Aerospace & Defence LeaderPhone: +91 124 330 6005Email: [email protected]

BangaloreIndraneel Roy Choudhary Executive DirectorPhone: +91 80 4079 6001Email: [email protected]

Vivek MallyaPhone: +91 80 4079 6006Email: [email protected]

Prithwijit ChakiPhone: +91 80 4070 4041

Email: [email protected]

ChennaiR. SridharPhone: + 91 44 4228 5059Email: [email protected]

Delhi NCRRajan WadhawanExecutive DirectorFinancial Advisory ServicesPhone: +91 124 330 6014Email: [email protected]

Col. Rajiv ChibPhone: + 91 124 330 6026Email: [email protected]

Jairaj PurandareMarkets and Industry LeaderPhone: +91 22 6669 1400Email: [email protected]

Radhika JainPhone: +91 124 330 6023Email: [email protected]

Hyderabad Ashlesh VarmaExecutive DirectorTax & Regulatory ServicesPhone: +91 40 66246699Email: [email protected]

MumbaiNeha PunaterPhone: +91 22 6669 1385Email: [email protected]


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Notes


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AboutConfederation of Indian Industry

The Confederation of Indian Industry (CII) works to create and sustain anenvironment conducive to the growth of industry in India, partnering industry andgovernment alike through advisory and consultative processes.

CII is a non-government, not-for-pro t, industry led and industry managedorganisation, playing a proactive role in Indias development process. Founded over115 years ago, it is Indias premier business association, with a direct membership ofover 8100 organisations from the private as well as public sectors, including SMEsand MNCs, and an indirect membership of over 90,000 companies from around 400national and regional sectoral associations.

CII catalyses change by working closely with government on policy issues,enhancing ef ciency, competitiveness and expanding business opportunities forindustry through a range of specialised services and global linkages. It also providesa platform for sectoral consensus building and networking. Major emphasis is laidon projecting a positive image of business, assisting industry to identify and executecorporate citizenship programmes. Partnerships with over 120 NGOs across thecountry carry forward our initiatives in integrated and inclusive development, whichinclude health, education, livelihood, diversity management, skill development andenvironment, to name a few.

CII has taken up the agenda of Business for Livelihood for the year 2010-11.

Businesses are part of civil society and creating livelihoods is the best act ofcorporate social responsibility. Looking ahead, the focus for 2010-11 would beon the four key Enablers for Sustainable Enterprises: Education, Employability,Innovation and Entrepreneurship. While Education and Employability help create aquali ed and skilled workforce, Innovation and Entrepreneurship would drive growthand employment generation.

With 64 of ces in India, 9 overseas in Australia, Austria, China, France, Germany,Japan, Singapore, UK, and USA, and institutional partnerships with 223 counterpartorganisations in 90 countries, CII serves as a reference point for Indian industry andthe international business community.

Reach us via our Membership Helpline: +91 011 43546244 / +91 09910446244

ContactNo. 1086, 12th Main, HAL 2nd StageIndiranagar, Bangalore 560 008, Karnataka, IndiaTel: +91 80 42889595 Fax: +91 80 25276709Email: [email protected]: cii.in


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PricewaterhouseCoopers (www.pwc.com) provides industry-focused taxand advisory services to build public trust and enhance value for our clientsand their stakeholders. More than 163,000 people in 151 countries acrossour network share their thinking, experience and solutions to develop freshperspectives and practical advice.

At PricewaterhouseCoopers (PwC), we push ourselves - and our clients - tothink harder, to understand the consequences of every action and to considernew perspectives. Our goal is to deliver a distinctive experience to our clientsand people around the world.

In India, PwC (www.pwc.com/India) offers a comprehensive portfolio of Advisory and Tax & Regulatory services; each, in turn, presents a basket of

nely de ned deliverables. Complementing our depth of industry expertise andbreadth of skills is our sound knowledge of the local business environment inIndia. We are committed to working with our clients in India and beyond todeliver the solutions that help them take on the challenges of the ever-changingbusiness environment.

PwC has of ces in Ahmedabad, Bangalore, Bhubaneshwar, Chennai, DelhiNCR, Hyderabad, Kolkata, Mumbai and Pune.

AboutPricewaterhouseCoopers

This report does not constitute professional advice. The information in this report has been obtained orderived from sources believed by PricewaterhouseCoopers Pvt. Ltd. (PwCPL) to be reliable but PwC PLdoes not represent that this information is accurate or complete. Any opinions or estimates contained

in this report represent the judgment of PwCPL at this time and are subject to change without notice.Readers of this report are advised to seek their own professional advice before taking any course of actionor decision, for which they are entirely responsible, based on the contents of this report. PwCPL neitheraccepts or assumes any responsibility or liability to any reader of this report in respect of the informationcontained within it or for any decisions readers may take or decide not to or fail to take


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Documents

Pwc Karnataka Aerospace Hub of India Report 091211